Club Property

You know I like to keep a watch on the Australian market for clues on what is happening in terms of investment, strategy and possible direction which is why I think this article is a good one to take a look at.
New Zealand is closely correlated to Australia in many things so have a read and ponder.

Australia is on the brink of an unemployment challenge, with up to 100,000 jobs set to be slashed in the months after Christmas. And interest rates will drop again next year bringing the cash rate to 3.5%.

These are the thoughts of Westpac chief economist Bill Evans, one of the few economists who correctly predicted a rate cut in November.

“We would expect the unemployment rate to edge up to 5.75 over the next six months,” Mr Evans warned.

“But on the flipside, the Reserve Bank would have to cut the cash rate by at least half a per cent to counter (the job losses).”

The comments come as research firm CoreData suggested the number of unemployed people in Australia will jump by nearly 106,000 next year, assuming the labour force grows at its current rate and the unemployment rate rose to 5.75 per cent, as predicted.

CoreData boss Andrew Inwood was reported in news.com saying the problem would be felt nationwide.

“One in five Australians now think they are going to lose their jobs in the next 12 months,” Mr Inwood said.

Watch the latest market update video from Westpac chief economist Bill Evans.

Economist Steven Keen is at it again. This time he’s predicting house prices will drop 5 to 10 percent in 2012.

Is he right?

Well…2012 will be a tough year for property, but before I answer the question I posed, I’d like to mention that I find it interesting that Professor Keen is only predicting a 10% drop.

In the past he saw houses prices falling 40%. He made a public statement and put his money where his mouth was selling his home in Sydney a few years ago just before prices boomed.

Keen, who was forced to take a hike up Mt Kosciuszko in 2010 after losing a bet that house prices would fall 40 per cent, recently forecast a drop of between 5 and 10 per cent next year because buyers would opt to pay off loans rather than take on more debt.

In an article in the Sydney Morning Herald experts were lining up to contradict the extremist property analyst Steve Keen’s prediction with most forecasting moderate growth.

Releasing the Australian Property Monitors‘ property market outlook, senior economist Andrew Wilson tipped 3 to 5 per cent growth in median house prices nationally and for Sydney.

Dr Wilson believes ”demand for housing will intensify”, pushing up prices.

Median house prices nationally had dropped 4.2 per cent over 2011, he said, and 1.6 per cent in the October quarter.

Of course we’ve had two interest arte drops recently, but concerns about the European economy are taking their toll, with most Australian’s preferring to stash their cash or pay down debt as they see how things play out overseas. Many potential property buyers are waiting to make sure house prices don’t fall further.

Looking ahead, Dr Wilson said that since Australia’s economic fundamentals were strong, the nation was well positioned to weather any downturn in international markets.

”This, coupled with renewed buyer confidence, will be the key to driving prices growth in the new year,” he said.

Brisbane and Perth to do well

He said that Brisbane, the worst performer this year with prices down almost 7 per cent mainly due to the devastating January floods, would bounce back between 5 and 10 per cent off the back of the resources boom.

Likewise, Perth and Darwin. But Melbourne, due to big price rises in 2009 and 2010 and an apartment oversupply, could expect growth of between 0 and 3 per cent.

Shane Oliver, the head of investment strategy and chief economist at AMP Capital Investors, also disagreed with Keen. ”Didn’t he forecast a 40 per cent drop a few years ago?” he joked.

However, Oliver isn’t as upbeat as the others, expecting a weak start to 2012 because of economic uncertainty. Over the year, he says prices could drop 1 or 2 per cent nationally but he is more optimistic about Sydney. ”I’m expecting modest gains over the year of maybe 1 or 2 per cent for Sydney,” he said.

via propertyupdate.com.au

He is a wise man who does not grieve for the things which he has not, but rejoices for those which he has.

Housing affordability has been in the headlines again, but this time around some seriously good research is the cause.

A new study for AHURI (Australian Housing and Urban Research Institute) strongly suggests that the traditional method of calculating housing affordability is out-dated and should be considered in conjunction with other ways of weighing up whether people can afford their mortgage or rent.

We have been banging on about this for close to a decade and this missive pulls together some of our thoughts on this matter.

The most commonly used benchmark to determine whether housing is affordable, is if it costs less than 30% of a household’s income.  However, few know that the 30% benchmark was established at the Government’s 1992 National Housing Strategy and was intended to apply to lower-income households only.  However, it is more often than not now quoted in reference to all households – even those on higher incomes.

Another point of contention is the source of the “household income” information.  Most commentary on this issue uses median weekly family income.  A family is defined as a married couple with or without dependent children.  Such a definition is quite prescriptive and precludes a large number of home buyers.  No consideration is given to age, for example, which provides a much better basis on which to analyse housing affordability.

Also contentious is that the income data is derived from the ABS Census and updated on the basis of movements in average weekly earnings.  We remain sceptical about certain elements of the Census and the income data concerns us the most.   One in eight households across Australia do not state their income on their census form; resulting, we believe, in a lower median household income than is really the case.

In our experience, using income figures sourced from the Australian Tax Office provides a more accurate picture.  And the statistics here don’t lie with median household income, across Queensland for example, being 21% higher when measured by the ATO against the Census.  In short, it is harder to lie to the ATO than it is to the statistical bureau.

Some better measures

The first one looks at income left over after debt servicing.  This approach paints a different picture to that obtained simply by calculating the proportion of income devoted to repayments.  Rising incomes have allowed households to meet rising loan repayments whilst maintaining, and often increasing, living standards.  Rising household incomes mean that the 30% traditional affordability benchmark is now out-dated.  In fact, given higher income levels now, households can devote as much as half of their income to debt servicing, whilst maintaining the same standard of living.  The AHURI study found similar results.

Another approach recognises the shortcomings of using median incomes of all households (or families) and instead considers the incomes of households in the age bracket of typical first-home buyers.  In this case, this relates to households in the 25 to 39 age bracket.  When looking at the proportion of residential sales by price range and taking into account interest rates and borrowing capacity, the typical first-home buyer could afford to buy one-third of the dwellings for sale across the country.  We estimate that this figure lifts to just under 40% for Queensland.  Now, while this is down on the long-term average of 45%, housing affordability measured by this series appears far less stressed than the traditional measures.

The big problem here is that first-home buyers these days want everything that opens and shuts in their first home.  A recent ABS study shows that three out of four first-home buyers bought either three or four-bedroom dwellings last year, with 26% buying a property with four or more bedrooms – as their first home!  It probably had fully ducted air, secured off-street parking and a swimming pool, too.

A third of first-home buyers are couples and another 25% live alone.

The last measure involves taking into account investment assets and income.  Ratios of household debt to assets have been much more stable over recent years than the ratios of debt to income.  It needs to be noted that traditional measures of affordability fail to take into account investment income.  When you do so, affordability measures appear far less stretched.

These three measures suggest that housing affordability is not as dire as many fear.  This is borne out by Australia’s very low housing loan arrears rate.  Whilst the housing loan arrears rate has risen over the five years, it still remains low by international comparison.

Anecdotal evidence also suggests that housing affordability is not as constrained as some would have us believe.  If you remain sceptical, spend a few hours in a major shopping centre and watch how many potential first-home buyers are spending up – and big.  Or visit your local airport on the weekend and see how many young couples are off for a weekend away.  The same applies when dining in some of our better restaurants.

Housing affordability is at nowhere near crisis level in this country.  Instead of the government giving ‘hand outs’ to first home buyers – which only lifts price – policy should address structural factors that lead to excessive housing demand and/or inadequate supply.  And please don’t get me started on the baby bonus!

In the meantime, some “plain speak” is needed.  Potential first-home buyers need to be told that buying your first property is not easy; it involves sacrifice and compromise to your current lifestyle.

To renters (and first-home buyers alike) paying 30% of your income for shelter is not outrageous.

via matusikmissive.wordpress.com

People who fail to achieve their goals usually get stopped by frustration. They allow frustration to keep them from taking the necessary actions that would support them in achieving their desire. You get through this roadblock by plowing through frustration, taking each setback as feedback you can learn from, and pushing ahead. I doubt you’ll find many successful people who have not experienced this. All successful people learn that success is buried on the other side of frustration.” –Tony Robbins

As you know I have spent a large part of my time living in Australia and investing there.
Even though we like to think of ourselves as different to those aussies, the reality is that when it comes to investing in real estate we pretty well follow the same rules.

Off The Plan investments have always been popular in Australia and for a few people in NZ the same can be said so I thought this article from the Matusik Missive would be particularly relevant.

There have been several short reports for public consumption of late, discussing off-the-plan buying.  Most have been masquerading as buyer tips or advice, but they take a very pro-developer side of things.

Now, without wanting to peeve too many of our developer clients – we have helped, after all, over 550 new residential developments (nearly all of which involved pre-selling) come to fruition over the past 15 years – below are my thoughts as to what a buyer should be asking when considering buying a dwelling before it has started construction.

I haven’t bothered to comment on the obvious here – stamp duty concessions; building depreciation; potential for growth before settlement (don’t we all wish!); time to sell your house or other investments or even the need to match the dwelling type to demographic/economic demand – but have touched on some less covered ground.

There can be great benefits to buying off the plan, but inherent in such purchases is risk.

One of the biggest risks is that the project is cancelled – or that the completion date will be delayed for lengthy periods of time, during which you may be required to commence paying fees without the ability to live in or rent out the property.

Another risk is that the development will not be built to a high enough standard to reflect the price you paid.

A third risk – which applies to investors – is that your property won’t attract the actual rent and yield you were told it would.

It is important to do your own homework in order to limit your risks – ascertain information regarding the property you are interested in and comparable sales/rents in the area.   It is also important to seek legal advice regarding the terms of any contract.  Okay, now that the basic caveats are out of the way, here we go.

Risk 1 – the building is late or doesn’t happen

Right off the bat, a buyer should question the number of sales being reported.  A fast sales rate, with only a few remaining for sale, is one of the oldest spruiks in the book – it’s project marketing 101.

It used to be that a new off-the-plan dwelling sale was only reported as “sold” when a contract went unconditional, the full deposit was paid and all the necessary documentation was signed by both parties.  Too often today a “sale” is reported, based on a holding deposit only – sometimes as little as $1,000.

One service my business conducts is “mystery shopping”.  We send buyers to new projects to critique sales techniques and to ascertain the real sales status.  Often, and increasingly of late, our mystery shoppers have been able to purchase “sold” stock.  Sometimes up to a third of the sales claimed to be made had not really occurred at all.

In addition to challenging the number of reported sales, a buyer should also ask if the proposed project has all the necessary development and building approvals to go ahead.

Another good thing to query relates to multiple sales being made to the same buyer.  Also, ask if any sales have been made internally i.e. to people directly associated with the development; and whether any of the reported sales actually reflect unsold stock taken off the market.

A buyer should also question the time period for the reported sales.  Often developers will “soft” launch their new project to interested buyer groups many months before going to the open market.  Many of the sales might have been made during this period, yet the sales spruiking is often based on the public launch date.  Don’t always believe the “50 sales made in the first two weeks” or similar headlines.  Fifty sales might have been made but our experience is that they took many months, if not up to a year, to make.

Finally, in relation to this first risk, a buyer should ask about the financial conditions needed to be met before start of construction.  And although somewhat obvious, too few ask about the exact planned start and finishing dates.

Risk 2 – building standard

First and foremost, make sure you know the answers to these questions:  Who is the developer and/or builder?  What are their track records?  Have they developed/built buildings before, and do they have any history of being sued over defects?

Also important is to check that the three-Fs (fixtures, fittings and finishings) in the display and printed material are guaranteed.  Beware of glossy leaflets with annotations along the lines of “artist impression” and “subject to change or availability”.

Ask, too, whether the construction will merely meet Australian standards.  These standards are, in the main, inadequate for the realities of modern urban living; and in particular, for those residing in large apartment complexes.  You are better off paying for higher than the prescribed building standard. 

Risk 3 – rent and return

Paramount questions when building an off-the-plan apartment or townhouse are: Who will manage the complex?  What is their track record?  And under what circumstances could these arrangements change?

Sometimes the management rights are sold early in the piece.  That is okay, as selling the rights to manage a complex forms an integral part of a developer’s income stream.  But you should be told who they are and make sure that you have full voting rights at the first AGM.

Whilst many buyers ask how much the body corporate fees are; like they do with council rates; too few ask for a breakdown of the body corporate costs.  Nor do they ask about cost projections.

Also, make sure that your view – for which you will pay a premium – is unlikely to be blocked by any future development.  And also ask an independent agent for their opinion on the suggested rent.

In most cases, you will receive honest and satisfactory answers to these questions.  But in those rare examples that you don’t, our experience is that it might be best to move on.

via matusikmissive.wordpress.com

According to The Economist, Australian house prices are more overvalued than the US housing market at its peak.

According to the economic journal, there are two ways to track valuations: price-to-rent ratio and price-to-earnings ratio.  Just as a share price reflects a company’s future profits, house prices should reflect expected return.  If both measures are well above their long-term averages, then the property market is overvalued.

Australian house prices, The Economist says, are 53% overvalued relative to rental return and 38% overvalued relative to income. Australia, today, has more household debt than America at its housing-market peak, which leaves it – again according to The Economist – more vulnerable to a credit crunch, higher mortgage rates or a recession which drives up unemployment.  Either of which, The Economist says, could send house prices tumbling.

What balderdash!

I am not referring to the premise that a credit crunch, higher interest rates or rising unemployment would have a negative impact on the housing market, but rather the two measures used by The Economist to measure housing value.

According to our most recent Matusik Snapshot (Matusik Snapshot 499 – House price update) – how could you not subscribe ? (Snapshot Subscription form 24 issues $100) – Australian housing is becoming quite affordable again.  Falling end prices, coupled with falling interest rates and rising household incomes, have now made housing across Australia – and especially in Queensland, Western Australia, South Australia and Tasmania – much more affordable. For example, it now only takes 30% of household income to buy the median priced dwelling in Brisbane, even less in Perth, Adelaide and Hobart.

Prices are starting to get to the point where people will start buying again.  That doesn’t mean that prices will necessarily rise quickly, but they are unlikely to crash as strongly suggested by The Economist.

The Economist’s other housing value measure – the ratio of average house prices to average rents model – is seriously flawed.

There are several logical reasons why our house price to rent ratio is high; the sum of which dismisses The Economist’s claim.

Now, as recently outlined, the value of investment property (that is, stock held by investors) should be determined by its return (i.e. rent) but not owner-resident or even secondary homes.  Why?

Close to 70% of Australia’s dwellings are held by owner-residents, of which half are owned outright.  A third of Australia’s dwellings are held by investors and are rented out.  We can sell our principal place of residence tax-free.  Investment property is subject to capital gains tax.

In addition, two-thirds of the Australian housing dollar is spent on renovations, a trend which has accelerated since the introduction of GST on new dwellings about a decade ago. We estimate that close to 80% of this renovation money is spent on owner-occupied homes.

In contrast, very little is spent on improving investment dwellings.  Improvements to Australian investment property are done to increase the rental return, not necessarily the sales price.

Given the current tax laws, it makes good economic sense for owner-residents to improve their homes.  Hence, there is a large difference between the price of owner-occupied homes and investment property across Australia.  Many rental properties sell for prices in the mid-to-high $400,000s.  Most owner-occupied properties sell for much more, with close to 70% selling for prices over $500,000 and near to 40% selling for amounts in excess of $600,000.

Owner-residents generally prefer detached houses over attached stock.  The reverse is true for investors.  Attached stock is, more often than not, cheaper than detached housing.  More renters live in attached stock than detached product.  This further exacerbates the reason why end prices – when pooled together – far exceed rents in this country.

So there is little wonder that the average price of Australian houses is much more than the average rent.  Our rental stock is inferior – for the most part – to the dwelling stock held by owner-residents.  A simple drive around any of our cities will illustrate such.

A house of horrors it is not!

via matusikmissive.wordpress.com

5 Property Lessons for 2012

To ensure you don’t get burned in the coming year and to give you a chance to make the most out of our changing property markets, I would now like to share some important lessons I’ve learned from previous cycles.

Probably the most important lesson we can all learn is to never get too carried away when the market is booming or too disenchanted during property slumps. Letting your emotions drive your investments is a sure-fire way to disaster.

Let’s look at 5 big lessons:

Lesson 1 – Booms don’t last forever

During a boom everyone is optimistic and expect the good times to last forever, just as we lose our confidence during a downturn. Our property market behaves cyclically and each boom sets us up for the next downturn, just as each downturn paves the way for the next boom.

Let’s face it…while the news is much less positive today, we know that over the next few years the flatter market conditions will be followed by another property boom and then another downturn. And over the next decade we’ll have another recession (we have one every seven to 10 years) and we’ll most likely have another depression one day.

The lesson from all this is; get prepared for the next phase of the property cycle. During the last cycle, most investors didn’t really have their downside covered or their upsides maximized.

Lesson 2 – Beware of Doomsayers.

For as long as I have been investing, and that’s over 37 years, I remember hearing people with excuses why property prices will stop rising, or even worse, why property values will plummet. However in that time, well located properties have doubled in value every 8 to 10 years.

Fear is a very powerful emotion, and one that the media use to grab our attention. Sadly some people miss out on the opportunity to develop their own financial independence because they listen to the messages of those who want to deflate the financial dreams of their fellow Australians.

Lesson 3 – Follow a System

Smart investors follow a system to take the emotion out of their decisions and ensure they don’t speculate. This may be boring, but it’s profitable. Let’s be honest, almost anyone can make money during a property boom because the market covers up most mistakes. But many investors without a system found themselves in financial trouble when the market turned.

Warren Buffet said it succinctly: “You only find out who is swimming naked when the tide goes out.” In other words, if you aren’t following a system that works in all market conditions you will be caught out when the market changes.

If you prefer to have consistent profits and reduced risk, follow a proven system. Make your investing boring, so the rest of your life can be exciting.

Lesson 4 – Get Rich Quick = Get Poor Quick

Real estate is a long term investment, yet some investors chase the “fast money.” You’ve probably met people like that – they look for that deal that will make them fabulously rich. When you see them a year later, they’re usually no better off financially and still talking about the next deal that will make them rich.

They are often influenced by the latest get-rich-quick artist who has a great story about how you can join them and become stupendously wealthy. Their stories can be very compelling, even hard to resist. They often pander to the wishes of people who would like to give up their day job to get involved in property full time, but in reality it takes most people many years to accumulate sufficient assets to do this.

Patience is an investment virtue. Warren Buffet said it right when he explained that: “Wealth is the transfer on money from the impatient to the patient.”

Lesson 5 – It’s about the property

You’re in the business of property investment, yet during the last boom many investors forgot the age-old property fundamentals of buying the best property they could afford in proven locations. Instead, they got sidetracked by glamorous finance or tax strategies and some lost out.

Smart investors do it differently. They make educated investment decisions based on research and buy a property below it’s intrinsic value, in an area that has above average long term capital growth and then add value, creating some extra capital growth.

These are just 5 of the many lessons that I learned from the recent property downturn.

We know that a few years ago the pendulum swung too far in some regions and the markets are catching their breath. In some areas property prices are flat and in others they have fallen and will continue to languish for a while.

We also know that if history repeats itself, some markets will swing too far into the negative, driven by fear.

If you learn these lessons from previous cycles the rollercoaster ride will not be as dramatic this time around because you won’t let your emotions drive your investment decisions. Remember both fear and greed will drive you down the wrong path.

If you believe in the Armageddon scenario, where banks collapse – but they aren’t bailed out – and all faith is lost in paper money, then you’d be bonkers to hold any shares at all.

Even holding gold or silver stocks would be risky… seeing as mining companies live and die not so much by the gold price, but by the ability to raise capital to dig for gold. Gold could go to $10,000 an ounce, but if mining companies can’t raise money to dig for the stuff it will count for nothing.

Think about it, gold mining and production didn’t stop when gold fell to USD$250. That was because financing was readily available for good projects. (We’ll explain why you should buy gold stocks in a moment).

So, if you’re in the Armageddon camp, your best bet is the survivalist approach: gold, silver, tinned hotdogs, water filter, toilet paper… and a stash of weaponry for personal safety.

But what if Armageddon doesn’t arrive?

Well, the alternative is this…

The next 10 or 20 years could play out in the same way as the last 10 or 20 years. Where the population is fooled by governments and bankers into thinking wealth is achieved through credit growth…

Whereas in reality, credit growth actually creates working poverty… where individuals work harder and longer just to maintain a standard of living, let alone improve on it.

What that means for you as an investor is making sure you invest in the right assets. You may not see gold soar from $1,700 to $5,000 in the next 12 months, but as governments continue to keep the truth about money printing from the public, the smart money will know what to do…

Buy inflation-beating assets: gold, silver, a few income paying stocks, and for leverage, a few gold and silver stocks too.

Oh, and don’t forget a bit of cash. Sure, inflation may chew it up, but it’s useful and far less volatile than stocks. Your other inflation-beating assets should more than make up any losses from holding cash.

The point is, while the ultimate result may be the same – the end of paper money – the route there could take either path.

We can’t say for certain which way things will turn out. But we know the uncertainty will continue…

And uncertainty means a volatile market… just as you’ve seen for the past three years. That means more government and central bank intervention, more money-printing… and a steady increase for gold and silver.

It’s in that kind of market that gold and silver stocks should outperform the gold and silver price as investors leverage to the rising gold and silver price. (Investors will buy gold and silver stocks even if they don’t understand why the metals are going up).

But not all gold and silver stocks will succeed. The key will be them getting access to shareholder financing. As we see it, in a tight credit environment only the best and most promising projects will get the cash… those are the gold and silver stocks to invest in.

Cheers.
Kris